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Capital Budgeting Techniques for Comparing Investment Criteria

Consider the following two mutually exclusive projects: whichever project you choose you require a 15% return on your investment. Round answers (a-d) to two decimal places and (e) to three decimal places.

Year Cash Flow (A) Cash Flow (B)

0 -$294,055 -$32,324
1 17,844 13,773
2 29,642 9,531
3 32,787 10,151
4 394,310 12,887

a. The payback period for Projects A and B is_____ and____years. If you apply the payback criterion, which project will you choose? Project A or B ? Round answer to 2 decimal places.

b. The discounted payback period for Projects A and B is____and____years, If you apply the discounted payback criterion, which project will you choose Project A or B ? Round answer to 2 decimal places.

c. The NPV for Projects A and B is $____and $____, If you apply the NPV criterion, which project will you choose Project A or B? Round answer to 2 decimal places.

d. The IRR for Projects A and B is____percent and____percent If you apply the IRR criterion, which project will you choose A or B? Round answer to 2 decimal places.

e. The profitability index for Projects A and B is____and____, respectively. If you apply the profitability index criterion, which project will you choose A or B? Round answer to 3 decimal places.

f. Based on your answers in (a) through (e), you finally choose Project
A or B_______? , Why______?

A. a. 3+(213,782 / 394,310)= 3.54216733 = 3.54 yrs
b. 2+(9,020 /10,151)=2.888582406= 2.88 yrs

*(numbers 2,3,4 are exponents in each problem -- Is there a way for me to write the numbers as exponents for this program?)

B. a. 17,844/1.15 + 29,642/1.15 2 + 32,787/ 1.15 3= 59488.11704
394,310 / 1.15 4= 225448.0223
3+(294,055 - 59488.11704/225448.0223)=
3+( 294054.7361)= 294057.7361 =3.61yrs

b. 13,773/ 1.15 + 9,531/1.15 2 = 19183.32703
10,151/ 1.15 3= 6674.447275
19183.32703 / 6674.447275= 2.874144665 = 2.87yrs

C. NPV=
a. -294,055 + 17,844/ 1.15 + 29,642/ 1.15 2 +32,787/1.15 3 + 394,310/ 1.15 4= -24619.8659 or is it 563490.1341 ?

b. -32,324 + 13,773/1.15 + 9,773/1.15 2 + 10,151/1.15 3 + 12,887/1.15 4= 1084.94515

D. IRR

Can you please help me with the IRR which should bring the NPV back to 0, I think it can be done using a spreadsheet.

E. PI
a. 269435.1341 / 294,055 = .916274622
b. 33408.94515/ 32,324 = 1.033564693

F. Which project should i choose and why?

i have the same problem yet with these numbers.

Year Cash Flow (A) Cash Flow (B)
0 -$168,156 -$27,484
1 15,885 12,243
2 32,152 12,669
3 32,860 10,751
4 342,460 9,531

Solution Preview

Payback period
TABLE-I
CASH FLOWS MACHINE A Cumulative cash flow MACHINE B Cumulative cash flow
YEAR 0 -294055 -294055 -32324 -32324
YEAR 1 17844 -276211 13773 -18551
YEAR 2 29642 -246569 9531 -9020
YEAR 3 32787 -213782 10151 1131
YEAR 4 394310 180528 12887 14018

A. a. 3+(213,782 / 394,310)= 3.54216733 = 3.54 yrs
b. 2+(9,020 /10,151)=2.888582406= 2.88 yrs

Your calculations are correct
Recommendations: Project B will be choosen as it has less payback period. It means that it will recoup its cash oulay ...

Solution Summary

This explains the evaluation of the project through various capital budgeting techniques by using various examples.

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